What Is the Roth IRA 5-Year Rule?


Withdrawing Roth IRA investment earnings before the account is 5 years old could trigger taxes and penalties.

By Rachel Hartman, March 10, 2021


If you want to withdraw funds before the account is 5 years old, aim to distribute contributions to the account instead of investment earnings.

ESTABLISHED IN 1997, the Roth individual retirement account has long been a favored option for retirement savings due to its promise of tax-free withdrawals in retirement. To make the most of this type of account, it’s essential to pay close attention to the details. “Roth IRAs have specific five-year rules that can create challenges if you are not aware of them,” says Brandon Steele, a certified financial planner and co-founder of Mainsail Financial Group in Bellevue, Washington. To avoid paying fees or penalties, you’ll want to follow the time-sensitive guidelines.

Keep in mind that the Roth IRA five-year rule:

Applies to investment earnings, not initial contributions.
Could trigger taxes and penalties on early withdrawals of investment earnings.
Applies to all account owners, regardless of age.

What Is the Roth IRA 5-Year Rule?

After opening and contributing to a Roth IRA, you’ll need to wait five years to begin tax-free withdrawals of investment earnings. “The very first contribution to your very first Roth IRA is what starts the clock,” Steele says. Once you open a Roth IRA and the five-year rule begins, the waiting period can be applied to other accounts.

After five years have passed, you’ll still need to meet certain requirements to be eligible to withdraw earnings without penalty. To qualify for tax-free withdrawals, you’ll also need to be 59 1/2 or older. “If your first contribution to a Roth IRA was at age 58, you still cannot take out all of your funds after 59 1/2 because you will not have satisfied the five-year rule,” Steele says. In this case, you will need to wait until age 63 for the account to be eligible for qualified distributions.

The five-year time frame is calculated based on tax years. The IRS determines a tax year as running from Jan. 1 to Dec. 31. The deadline for contributions coincides with the deadline for filing taxes. If you fund a Roth IRA in April 2021 for the calendar year of 2020, the five-year rule starts as of Jan. 1, 2020. You could begin withdrawing earnings from the account on or after Jan. 1, 2025.

If you want to withdraw funds before the account is 5 years old, aim to distribute contributions to the account instead of investment earnings. “Money contributed to a Roth can be withdrawn at any time regardless of age without tax or penalty,” says Ben Soccodato, a certified financial planner at Barnum Financial Group in Elmsford, New York. If you put $5,000 into a Roth IRA and want to take it out two months later, you can do so without tax or penalty if you meet the other qualifying requirements for withdrawals. However, the earnings would need to remain in the account until the account is 5 years old to avoid taxes and penalties.

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